The Oil Square is going through a rare situation, which has not been encountered in the last 30 years. The price curve for the futures contracts of Brent crude oil, ie the prices currently set for deliveries at different terms, took the form of a smile, the so-called “oil smile”.
Petroleum Square is going through a rare situation that has not been encountered over the past 30 years
This suggests that the market is in a state of extreme imbalance. At first glance, it seems to be a technical problem, but in reality, it can have a real impact on ordinary investors, traders and consumers.
What is “the smile of oil”
Futures Square allows the trading of futures contracts on oil with delivery in different periods of time. Normally, the price curve takes one of the following two forms.
The first form is nicknamed “Contango“, That is, futures prices are higher than today's spot prices. This usually indicates a weaker demand currently or a sufficient offer on the market. Contango is considered a common condition for this market, because the price of a futures contract includes not only the price price, but also the costs associated with transport and storage. Depending on the moment of delivery, explains XTB analysts.
The second form is “backwardedation“And it manifests when the futures prices are lower than the current spot prices. This suggests a restricted market and is a much rarer phenomenon than CONTANGO. Traders can adopt positions under backwarding conditions when they anticipate a decrease in prices, possible scenario in case of an increase in the offer while the demand remains constant.
At present, however, the market does not present any of these classic scenarios. The curve has a form of smile, which means that today's prices are high, decrease in the medium term (2025-2026) and then increase again to 2027.
Source: Lseg; Xtb
What factors determine this unusual form
According to analysts, “the smile of the oil“It reflects the strong pressure on the present offer, combined with an early surplus for the coming years. Estimates show that global oil production could grow by over 4 million barrels a day by 2026, with the most pronounced awaited growth in the first quarter of the year.
At the same time, the demand progresses at a much slower rate, which could lead to an important surplus of oil, points out XTB, an investment company on international scholarships. The US, Canada, Brazil and the countries of Opec+ are among the main actors who increase their productions and feed this dynamics.
The uncertain geopolitical situation also contributes to this phenomenon. The US threatens Russian oil buyers, especially India and China. Commercial wars and trump rates can compromise the global oil demand because they affect the industry and commercial flows.
The scenario could have serious consequences
It is an extremely rare situation, which has not been seen for three decades, say analysts. If the surplus forecasts will be true, the market will have to enter a strong CONTANGO phase, and the prices could drop far below $ 60 per barrel. For investors, this means great uncertainty on the market. Risk coverage is difficult, forecasts are complex, and strong fluctuations may occur at any time, XTB analysis shows.
